Summary
- Northrop Grumman, General Dynamics
GD and Huntington Ingalls Industries have predictable earnings and revenue growth. - All three companies are also undervalued or fairly valued currently.
While traditional airlines continue to recover following the decrease in travel demand caused by the Covid-19 pandemic, space startups like Jeff Bezos’ Blue Origin, Elon Musk’s SpaceX and Virgin Galactic Holdings Inc
While there are many startups in this industry vying to get a slice of the market share pie, investors may be interested in finding opportunities among established companies that are undervalued and have histories of predictable earnings and revenue growth.
As of Sept. 23, the GuruFocus All-in-One Screener, a Premium feature, found aerospace and defense companies that were significantly undervalued to fairly valued based on the GF Value and had a predictability rank of at least two out of five stars were Northrop Grumman Corp
Northrop Grumman
Northrop Grumman (NOC, Financial) has a $56.02 billion market cap; its shares were trading around $349.88 on Thursday with a price-earnings ratio of 12.63, a price-book ratio of 5.03 and a price-sales ratio of 1.53.
The Falls Church, Virginia-based company is one of the world’s largest weapons manufacturers and military technology providers. Its products range from aircraft, combat vehicles and spacecraft to cybersecurity systems and radars.
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Trading with a GF Value of $374.29 and a price-to-GF Value ratio of 0.94, the stock appears to be fairly valued currently based on historical ratios, past performance and future earnings projections.
The GF Value Line suggests Northrop Grumman is fairly valued.
The valuation rank of 6 out of 10, however, leans more toward undervaluation since the share price and price-book ratio are both approaching multiyear lows.
GuruFocus rated Northrup Grumman’s financial strength 5 out of 10. Despite having adequate interest coverage, the Altman Z-Score of 2.96 indicates the company is under some pressure since assets are building up at a faster rate than revenue is growing. The return on invested capital, however, overshadows the weighted average cost of capital, suggesting value is being created as the company grows.
The company’s profitability scored a 9 out of 10 rating. Although the operating margin is declining, it is supported by strong returns on equity, assets and capital that outperform a majority of competitors. Northrup Grumman also has a moderate Piotroski F-Score of 6 out of 9, meaning business conditions are typical for a stable company. Consistent earnings and revenue growth contributed to a 4.5-star predictability rank. According to GuruFocus, companies with this rank return an average of 10.6% annually over a 10-year period.
Of the gurus invested in Northrop Grumman, Jim Simons (Trades, Portfolio)’ Renaissance Technologies has the largest position with 0.31% of its outstanding shares. Other top guru shareholders include Yacktman Asset Management (Trades, Portfolio)’s funds, Joel Greenblatt (Trades, Portfolio), Pioneer Investments, Louis Moore Bacon (Trades, Portfolio), Scott Black (Trades, Portfolio), Lee Ainslie (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and Ken Fisher (Trades, Portfolio).
General Dynamics
General Dynamics (GD, Financial) has a market cap of $55.16 billion; its shares were trading around $197.29 on Thursday with a price-earnings ratio of 17.19, a price-book ratio of 3.61 and a price-sales ratio of 1.47.
The company, which is headquartered in Reston, Virginia, manufactures everything from Gulfstream business jets and combat vehicles to nuclear-powered submarines and communications systems.
According to the GF Value of $188.25 and a price-to-GF Value ratio of 1.05, the stock is fairly valued currently.
The GF Value Line shows General Dynamics is fairly valued.
The valuation rank of 6 out of 10 points to undervaluation even though its share price and price-sales ratio are closing in on multiyear highs.
General Dynamics’ financial strength was rated 5 out of 10 by GuruFocus. In addition to sufficient interest coverage, the Altman Z-Score of 3.03 indicates the company is in good standing despite the fact its assets are building up faster than revenue is growing. The ROIC also slightly eclipses the WACC, indicating value creation is occurring.
The company’s profitability fared better, scoring a 7 out of 10 rating. Even though margins are declining, General Dynamics is supported by returns that outperform a majority of industry peers as well as a moderate Piotroski F-Score of 5. Regardless of a slowdown in revenue per share growth over the past 12 months, the company has a three-star predictability rank. GuruFocus says companies with this rank return, on average, 8.2% annually.
With a 0.88% stake, Barrow, Hanley, Mewhinney & Strauss is the company’s largest guru shareholder. PRIMECAP Management (Trades, Portfolio), Bill Nygren (Trades, Portfolio), Tom Gayner (Trades, Portfolio), Charles Brandes (Trades, Portfolio), First Eagle Investment (Trades, Portfolio), Richard Snow (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Mark Hillman (Trades, Portfolio), Bernard Horn (Trades, Portfolio), Greenblatt, Pioneer Investments, Chuck Royce (Trades, Portfolio) and Fisher also own the stock.
Huntington Ingalls Industries
Huntington Ingalls Industries (HII, Financial) has a $7.78 billion market cap; its shares were trading around $194.41 on Thursday with a price-earnings ratio of 10.49, a price-book ratio of 3.79 and a price-sales ratio of 0.81.
The Newport News, Virginia-based company is the largest military shipbuilder in the U.S. It also provides professional services to partners in government as well as its industry.
Based on a GF Value of $237.11 and a price-to-GF Value ratio of 0.81, the stock appears to be modestly undervalued currently.
The GF Value Line shows Huntington Ingalls is modestly undervalued.
The valuation rank of 8 out of 10, however, favors undervaluation.
GuruFocus rated Huntington Ingalls’ financial strength 5 out of 10. In addition to adequate interest coverage, the high Altman Z-Score of 3 suggests the company is in good standing. The ROIC also surpasses the WACC, indicating good value creation.
The company’s profitability scored a 7 out of 10 rating. Even though the operating margin is declining, Huntington Ingalls has strong returns that outperform a majority of competitors and a moderate Piotroski F-Score of 6. Steady earnings and revenue growth contributed to a two-star predictability rank. GuruFocus data shows companies with this rank return an annual average of 6%.
Simons’ firm is the company’s largest guru shareholder with 0.19% of its outstanding shares. Pioneer Investments, Greenblatt, Jones and Ray Dalio (Trades, Portfolio) also have positions in Huntington Ingalls.
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Disclosures
I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
